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The rate of consumer-price growth dropped to 1.2 percent from 1.5 percent in August, the Office for National Statistics said today. That’s the lowest since September 2009 and compared with the median estimate in a Bloomberg survey for a reading of 1.4 percent. Core inflation also slowed to a five-year low. Britain’s currency slid as investors bet the data will support the Bank of England keeping interest rates at a record low.
Policy makers left their benchmark at 0.5 percent this
month, and Governor Mark Carney has said the global inflationary environment is “benign.” That underscores the case for the central bank to keep emergency policy settings as a deterioration in the euro-area economy creates headwinds to the U.K.’s expansion.
“It’s getting more and more difficult to see a short-term increase in rates,” said Philip Shaw, an economist at Investec Securities Ltd. in London. “It may well be that we don’t get a change in rates until summer next year, given the global outlook and the inflation environment.”
The pound plunged 0.7 percent after the data were published and was at $1.5972 as of 10:23 a.m. London time. The implied yields on short-sterling futures declined, as traders pared bets for higher rates.
BOE Target
Prices for food and non-alcoholic drinks fell an annual 1.4 percent in September, the most since 2002, and motor fuels dropped 6 percent. If these were excluded, inflation in September would have been 1.6 percent. The statistics office said it’s “plausible” that increased supermarket competition, an appreciation of the pound and a drop in oil prices are playing a role in the broader trend of cooling inflation.Price growth has now been below the BOE’s 2 percent target for nine months. The latest drop in the rate pushes the governor closer to having to write a letter of explanation to Chancellor of the Exchequer George Osborne. A letter is triggered when inflation moves more than 1 percentage point away from the goal.
In the third quarter, inflation averaged 1.5 percent. That compares with the BOE’s forecast in August for a rate of 1.81 percent. It will update its projections next month.
“Low inflation gives the BOE room to wait before hiking rates,” said Rob Wood, chief U.K. economist at Berenberg Bank in London. “We expect inflation to run below the Bank of England’s 2 percent target until the back end of 2016.”
Producer Prices
A separate report today showed factory-gate prices fell 0.1 percent in September from August and were down 0.4 percent from a year earlier, the biggest year-on-year drop since 2009. Input prices plunged an annual 7.4 percent, led by crude oil.Brent crude has plunged about 17 percent in the past three months and is close to the lowest level in about four years.
“There is persistent disinflation in a couple of major economies,” Carney said in a CNBC interview broadcast yesterday. In the oil market, “there is weaker global demand relative to global potential, that is producing a very benign global inflationary environment,” he said.
The BOE’s first rate increase is now seen in a year at the earliest, according to forward rates on the sterling overnight interbank average compiled by Tullett Prebon Plc. Last week the contracts showed a 25 basis-point increase in August.
Under a separate measure of price growth, the retail-price index, inflation slowed to 2.3 percent in September from 2.4 August.
While inflation is slowing, sluggish wage growth means consumers are continuing to be squeezed. Data tomorrow may show average earnings rose an annual 0.7 percent in the three months through August. That same report may also show unemployment rate fell in the period, according to the median forecast of economists.
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